Getting a business loan is a big step for many SMEs. If you’re new to borrowing, you may not be familiar with your obligations as a borrower and what your lender expects of you. One such thing is your business loan EMIs and the need to pay them on time. If you miss your EMI payments for many months in a row, your lenders may flag that as a defaulted business loan.
A business loan default has serious consequences and can affect your ability to access formal finance in the future. Let’s learn how.
What does it mean to default on my business loan?
If you do not may your business loan EMIs for at least 3 months or more, the lender may consider that as a default. A default means you no longer have the financial ability to repay the loan you have borrowed from the lender. Defaulted business loans can be classified into two types:
- Non-Wilful Defaults: When you default on a business loan because of reasons out of your control but have a direct effect on your finances, such as a faulty business deal or loss of a job, it is considered a non-wilful default.
- Wilful Defaults: If you default on a business loan despite being in a strong financial position and choose to deny your loan terms, it is considered a wilful default. Wilful defaults directly impact your credit score and affect your chances of getting a business loan in the future.
What will my lender do if I default on my business loan?
If you default on your business loan, your lender has a few options available to them to recover the amount you owe them. Which course of action they choose depends on the type of loan you’ve taken, the value of your loan, the security you put up for the loan, and your relationship with your lender. These can range from increasing your loan fees to taking possession of your loan collateral or even initiating legal action against you.
The severity of the action the lender takes after you’ve defaulted on your business loan will depend on whether you’ve borrowed a secured or unsecured business loan and how much you owe the lender.
- If you default on a secured business loan, your lender can start the process to foreclose the collateral you pledged as security against the loan.
- Once the lender takes control of the collateral, they can begin to recover the loss associated with your business loan by either selling or renting the collateral.
- Depending on what you have used as collateral, you can either lose control of your business or your commercial or residential property.
- If you default on a collateral-free (unsecured) business loan, your lender does not have any collateral to sell to recover their loss.
- Therefore, they may either charge you a late fee or add a penalty on your next EMI amount due.
- They can also begin legal proceedings against you to recover their losses.
A default on your business loan is a serious financial matter and affects your creditworthiness. Recovering from a business loan default is a slow process and depends on your financial behaviour after the business loan default. Fulfilling all your financial responsibilities on time and maintaining a responsible attitude towards your lender will help you recover faster.
When you apply for a business loan with CreditEnable, we do a soft pull of your Experian credit score to check your eligibility for the business loan. If you’ve defaulted on a business loan in the past, you may not be eligible for a business loan with one of our lender partners, depending on how recent the default was. After assessing your creditworthiness, we will inform you upfront whether you meet our lenders’ credit requirements. This protects your credit score from taking a negative hit when a lender rejects your application and gives you a clear understanding of your credit standing. If you don’t meet any of our lender’s requirements, we’ll tell you ways to improve your creditworthiness which will help you become eligible for a business loan in the future.
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